Disclaimer: Any opinions expressed, potshots taken, or scientific views articulated are mine, and need not represent the opinions, potshots, or scientific views of the Federal Reserve Bank of St. Louis, or the Federal Reserve System.

Monday, October 18, 2010

China-Bashing

I spent the weekend in Toronto, which was something of a respite from the conflict and anger that is roiling in the United States of America. In Toronto, construction (both residential and non-residential) is apparently booming, nobody is angry with the banks (none of which were bailed out or failed during the financial crisis) or with politicians (more than is normal), and the peoples of the world appear to be living together in Toronto with a high degree of tolerance for each others' different habits.

Now, it's Monday morning, I'm back in St. Louis, and Paul Krugman is at it again. He discusses the recent marine dispute between Japan and China, then gets to the meat of the matter:

Major economic powers, realizing that they have an important stake in the international system, are normally very hesitant about resorting to economic warfare, even in the face of severe provocation — witness the way U.S. policy makers have agonized and temporized over what to do about China’s grossly protectionist exchange-rate policy. China, however, showed no hesitation at all about using its trade muscle to get its way in a political dispute, in clear — if denied — violation of international trade law.

Note that Krugman is careful here to use the term "economic warfare." However, it's hard to draw the line between economic warfare and actual guns-and-bullets warfare. The United States, being a "major economic power" has hardly been hesitant in the past to use force to further its own economic interests. One could view the Cold War as a fight by the US to curtail the economic power of the USSR, which threatened the economic power of the US. The United States continues to bully Cuba with an economic embargo, in spite of the fact that Cold War issues were resolved long ago. United States incursions into the Middle East in an attempt to secure oil supplies are of course well-known. You can ask the Canadians about "economic warfare" with the United States. In spite of NAFTA, the US periodically picks a fight with Canada over some trade issue - lumber, for example. One rarely hears about these issues in the US media, but Canadians are well-aware of them.

Finally, Krugman summarizes as follows:

Couple the rare earth story with China’s behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy — and what you have is a portrait of a rogue economic superpower, unwilling to play by the rules. And the question is what the rest of us are going to do about it.

Here we have the pot calling the kettle black again. I'm sure the United States has never subsidized a domestic producer or encouraged a foreign company to locate here - in your dreams. While I'm sure many Americans want to view the United States as representing the forces of good in the world, there are many instances in modern history when the US has been seen in the rest of the world as the rogue economic superpower that sets the rules. The rules that Krugman wants China to play by are US rules, set up to serve US interests.

As I have argued elsewhere (here and here) the attempt to force China into intervening to cause its currency to appreciate is misguided. I'm not sure what Krugman has in mind in the last sentence of his piece (above), but I think that the United States has to become accustomed to the idea that its relative power (and possibly absolute power as well) is waning. Even if China is ultimately a bully, the US has to live with it. But, take heart. Through its entire existence, Canada has lived next door to a bully, and it seems to do fine.

Yes, the wording was deliberate. All of the language in this debate is about China "intervening" to keep the value of their currency "artificially low" which I don't think gets at the "truth" of the matter.

For the truth on the US as a rogue economic superpower, one doesn't have to look much further than the words of war hero US Marine Corps Major General Smedley Butler (1881-1940):

"I spent 33 years and four months in active military service and during that period I spent most of my time as a high class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902-1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents."

By the way, I've noticed, just over the past few days, that people are referring to China as a "superpower", rather than an "emerging superpower". Congratulations to the new bully on the block!

The job of the US government is to maximize the welfare of Americans. That's the way it is.

You seem to be quite happy to be here feeding at the trough. By your own analysis, part of your salary comes from those policies. If you don't like, take a pay cut and move back to Canada. Or send some money back to Canada so they can for their own defense instead of relying on the US taxpayer. Wow. Your hypocrisy is stunning.

Yes, 'One could view the Cold War as a fight by the US to curtail the economic power of the USSR, which threatened the economic power of the US,' but I doubt that it would be wise to do so. And yes, it may indeed be 'hard to draw the line between economic warfare and actual guns-and-bullets warfare,' but do you take seriously your charge of equivalence between US 'economic warfare' vis-a-vis Canada (since, say, 1812) and what possibly lays in store for such warfare carried out by China vis-a-vis its trading partners (e.g., the ASEAN nations)? Really?

Supplying reliable and rigorously-argued antidotes to Paul Krugman's many nostrums doesn't require dilettantish rewriting of history.

It's true that our leaders are not always wise or perfect at maximizing US welfare. But your problem seemed to be that US was not maximizing someone else's utility, e.g. Canada. That's just not the problem they are supposed to solve.

In any event for a US citizen you sure seem to spend a lot of time worry and talking about Canada.

As global citizens, for the reasons made clear by "last Anonymous" (not to mention Smedley Butler) we need to curtail national power (economic or political).

Even if the US government does manage to maximize US welfare (whatever that means in a heterogenous society) a non-cooperative equilibrium among national powers can be a very nasty thing indeed. As the 100th anniversary of WWI looms, surely we have learned that lesson!

Even from a purely selfish US perspective, with declining US power and China ascendant, it seems obvious that the US should be furiously investing in the institutions of international cooperation: the UN, the International Criminal Court, and so on. The fact that recent US administrations have not been doing that raises questions about what they've actually been trying to maximize.

The truth is that power, in any shape or form, leads to abuse in some shape or form. This would be true even if, by some crazy miracle, the Canadians ever had any...

"But your problem seemed to be that US was not maximizing someone else's utility, e.g. Canada."

No, the point is that many of these policies are wrongheaded and don't on net help the United States, let alone anyone else. For example, a trade war with Canada over lumber may help some US lumber producers, but the rest of us pay higher prices for the stuff.

"...r a US citizen you sure seem to spend a lot of time worry and talking about Canada."

So US citizens are supposed to ignore what goes on in the rest of the world?

Mr. King makes an interesting point. The question is what mix of unilateral actions by the US and investments in multilateral institutions are most likely to maximize the welfare of Americans.

I am not against multilateral efforts. But the record of such efforts has been dismal. The UN? Really. Indeed, with the exception of US led NATO, I can't think of any great successes. Ask the Croations, Rowandans or Somalians how how effective multilateral institutions were in protecting them.

I wish it were not the case but the fact is that countries will always have to rely primarily on themselves to protect their own interests.

As for Mr. Williamson: the idea that you would treat the perpetrators of the Tiananmen square massacre, the inheritors of Mao Tse Tug and Soviet Russia under Stalin is ridiculous.. Perhaps he really does believe that the lumber dispute with Canada ranks with the crimes of Communist China and the Soviet Union. And he may believe that we fought the cold war over economic issues. He has every right to do so. But the rest of have the right to shake our heads in disbelief.

No, no. I haven't made myself understood. Obviously the Soviet system created a large quantity of misery, and I'm as happy as anyone that we're done with it. The Chinese government has a nasty attitude toward speech and freedom, which is creating internal tensions that I hope are ultimately resolved peacefully. My point is that the US is not in a strong position to be calling another country out as a "rogue economic superpower." For example, US behavior during the Cold War was not all about choosing good guys over bad guys. General Pinochet and the Shah of Iran come to mind. Further, I never said that trade disputes with Canada were on the order of disputes involving military force. Obviously that's silly.

"I think that the United States has to become accustomed to the idea that its relative power (and possibly absolute power as well) is waning."

Puzzling comment.

So you think that the American approach to China should not be predicated on American interests, but on the belief that American power is waning?

For the record, I think it's clear that the Chinese manipulation of its currency and other protectionist policies have become a serious problem - for America.

You seem to be saying - voila, these policies have made America so weak, there is nothing we can actually do about them, but accept them.

The way I see it, by contrast, if we aggressively pursue import substitution and tariffs, we will provide jobs for our people - and that is the most important economic goal, in the current circumstance. It's irrelevant if China is soaring or crashing. Our concern must be our people.

Some basic arithmetic on projecting relative US power, using current trends and PPP:

By 2016, China's GDP will be equal to that of the USA. At that time, China's per capita income will only be approximately 1/4 of that of the US. (This leaves plenty of room for further transitional growth for China.)

By 2026, China's GDP will be double that of the USA. At that time, China's per capita income will only be approximately 1/2 of that of the US. (This leaves plenty of room for further transitional growth for China.)

By 2033, China's GDP will be triple that of the USA by 2033. At that time, China's per capita income will only be approximately 2/3 of that of the US. (This leaves plenty of room for further transitional growth for China.)

In terms of economic power, the implications are obvious. In terms of political power, consider this: the potential of the military budget depends primarly on aggregate, not per-capita, income.

No amount of import substitution or tariffs can change the fact that the relative power of the US, both economically and politically, is waning...